SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED March 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ___________ TO ___________ .
Commission file number 0-28898
Independence Brewing Company
----------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2763840
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 East Comly Street, Philadelphia Pennsylvania 19149
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 537-2337
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: On May 14, 1997, 3,207,078
shares of the issuer's Common Stock, no par value, and 4,600,000 Redeemable
Warrants were outstanding.
Page 1 of 12
<PAGE>
Independence Brewing Company
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet at December 31, 1997 and
March 31, 1996 (unaudited) 3
Statements of Operations for the Three Months Ended
March 31, 1997 and 1996 (unaudited) 4
Statements of Changes in Shareholders Equity for the Three
Months Ended March 31, 1997 (unaudited) and the
Year Ended December 31, 1996 5
Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 (unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Page 2 of 12
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENCE BREWING COMPANY
March 31, 1997 and December 31, 1996
<PAGE>
Independence Brewing Company
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 3,284,780 $ 363,484
Accounts receivable 19,193 17,126
Inventories 128,253 134,816
Advances to officer -- 10,000
----------- -----------
Total current assets 3,432,226 525,426
Equipment and leasehold improvements, net 1,725,511 1,395,875
Deferred charges 94,994 2,981,931
Deferred stock issuance costs -- 338,910
Other 16,318 25,902
----------- -----------
$ 5,269,049 $ 5,268,044
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Current portion of long-term debt $ 74,748 $ 100,264
Current portion of capital lease obligations 4,026 4,026
Accounts payable and accrued expenses 373,920 753,749
----------- -----------
Total current liabilities 452,694 858,039
Long-term liabilities
Deferred rent 37,462 35,436
Convertible debentures -- 800,000
Long-term debt 522,632 517,497
----------- -----------
Total liabilities 1,012,788 2,210,972
----------- -----------
Series A preferred stock, $10.00 par value - authorized,
500,000 shares; no shares issued and outstanding -- --
----------- -----------
Series B preferred stock, $10.00 par value - authorized,
500,000 shares; issued and outstanding, 70,000 shares -- 700,000
----------- -----------
Shareholders' equity
Common stock, no par value - authorized, 19,000,000
shares; issued and outstanding, 3,207,078 and
2,307,078 shares in 1997 and 1996, respectively 8,980,413 3,691,428
Accumulated deficit (4,724,152) (1,334,356)
----------- -----------
Total shareholders' equity 4,256,261 2,357,072
----------- -----------
$ 5,269,049 $ 5,268,044
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3 of 12
<PAGE>
Independence Brewing Company
STATEMENTS OF OPERATIONS
Three months ended
March 31,
-----------------------------
1997 1996
---- ----
(unaudited)
Sales $ 101,551 $ 79,429
Less excise taxes 7,297 4,085
----------- -----------
Net sales 94,254 75,344
Cost of goods sold 259,896 208,592
----------- -----------
Gross loss (165,642) (133,248)
----------- -----------
Advertising, promotional and selling expenses 42,296 12,825
General and administrative expenses 237,441 65,099
----------- -----------
279,737 77,924
----------- -----------
Operating loss (445,379) (211,172)
----------- -----------
Other income (expense)
Interest expense (2,957,814) (16,139)
Other income, net 13,397 13,973
----------- -----------
(2,944,417) (2,166)
----------- -----------
Loss before income taxes (3,389,796) (213,338)
Income taxes -- --
----------- -----------
NET LOSS $(3,389,796) $ (213,338)
=========== ===========
Per share data
Net loss per common share $ (1.23) $ (0.18)
=========== ===========
Weighted average shares outstanding 2,762,922 1,173,139
=========== ===========
The accompanying notes are an integral part of these statements.
Page 4 of 12
<PAGE>
Independence Brewing Company
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months ended March 31, 1997 (unaudited) and the
year ended December 31, 1996
<TABLE>
<CAPTION>
Common stock
------------------ Total
Number of Accumulated shareholders'
shares Amount deficit equity
------ ------ ------- ------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 1,166,538 266,768 (111,229) 115,539
Issuance of common stock 1,140,540 3,424,660 -- 3,424,660
Net loss for the year ended
December 31, 1996 -- -- (1,223,127) (1,223,127)
----------- ----------- ----------- -----------
Balance at December 31, 1996 2,307,078 3,691,428 (1,334,356) 2,357,072
Issuance of common stock (unaudited) 900,000 5,288,985 -- 5,288,985
Net loss for the three months ended
March 31, 1997 (unaudited) -- -- (3,389,796) (3,389,796)
----------- ----------- ----------- -----------
Balance at March 31, 1997 (unaudited) $ 3,207,078 $ 8,980,413 $(4,724,152) $ 4,256,261
=========== =========== =========== ===========
</TABLE>
Page 5 of 12
The accompanying notes are an integral part of this statement.
<PAGE>
Independence Brewing Company
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months ended
March 31,
------------------------
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,389,796) $(213,338)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 26,190 15,000
Amortization of original issue discount 2,976,937 --
Increase (decrease) in accounts receivable (2,067) 4,270
Increase (decrease) in inventories 6,563 (23,645)
Decrease (increase) in other 360,520 2,270
Increase in accounts payable,
accrued expenses and other (389,830) 94,363
----------- ---------
Net cash used in operating
activities (411,483) (121,080)
----------- ---------
Cash flows from investing activities
Purchases of property and equipment (355,826) (43,101)
Other (90,000) --
----------- ---------
Net cash used in investing
activities (445,826) (43,101)
----------- ---------
Cash flows from financing activities
Proceeds from subordinated convertible notes -- 180,000
Repayments of long-term debt (20,380) (3,585)
Redemption of preferred stock (700,000) --
Proceeds from issuance of common stock 5,288,985 --
Advances from (repayments to) officers, net 10,000 --
Repayments of convertible debentures (800,000) --
----------- ---------
Net cash provided by financing
activities 3,778,605 176,415
----------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 2,921,296 12,234
Cash and cash equivalents at
beginning of period 363,484 2,782
----------- ---------
Cash and cash equivalents at
end of period $ 3,284,780 $ 15,016
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 6 of 12
<PAGE>
Independence Brewing Company
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Independence Brewing Company (the Company) is a regional producer of fresh,
high-quality, preservative-free, craft brewed ales, lagers, porters and
seasonal beers. The Company competes with other beer and beverage companies
not only for consumer acceptance and loyalty but also for shelf and tap
space in retail establishments and for marketing focus by the Company's
third-party wholesale distributors and their customers, all of which also
distribute and sell other beers and alcoholic beverage products.
The manufacture and sale of alcoholic beverages is a business that is highly
regulated and taxed at the federal, state and local levels. The Company's
operations may be subject to more restrictive regulations and increased
taxation by federal, state and governmental agencies than are those of
non-alcohol related businesses.
1. Interim Financial Information
The financial statements of the Company as of March 31, 1997 and for the
three months ended March 31, 1997 and 1996 and related footnote information
are unaudited. All adjustments (consisting only of normal recurring
adjustments) have been made which, in the opinion of management, are
necessary for a fair presentation. Results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the results
that may be expected for any future period.
2. Loss Per Common Share
Loss per common share was computed based on the weighted average number of
common shares and common share equivalents outstanding during the year, as
restated for the 100% stock dividend, effected in the form of a stock split,
issued on January 5, 1996 for shareholders of record on December 6, 1995.
Warrants were not considered because they are antidilutive. In connection
with certain Private Placements, 1,038,188 shares issued have been treated
as outstanding for all periods in calculating loss per common share because
such shares were issued for consideration below the Public Offering price of
$5.00 per share. Fully dilutive loss per common share has not been presented
because it was antidilutive.
The FASB has issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which is effective for financial statements issued
after December 15, 1997. Early adoption of the new standard eliminates
primary and fully diluted earnings per share and requires presentation of
basic and diluted earnings per share together with disclosure of how the per
share amounts were computed. The adoption of this new standard is not
expected to have a material impact on the disclosures of earnings per share
in the financial statements.
NOTE B - INVENTORIES
Inventories consist of the following:
March 31, December 31,
1997 1996
--------- -----------
(unaudited)
Raw materials $ 28,200 $ 11,513
Work in process 22,666 21,703
Finished goods 21,367 30,410
Packaging 56,020 71,190
-------- --------
$128,253 $134,816
======== ========
Page 7 of 12
<PAGE>
NOTE C - SHAREHOLDERS' EQUITY
The Company received approximately $5,289,000 of proceeds, net of
underwriting discounts and underwriting expenses from the sale 900,000
shares of Common Stock, no par value per share and 4,000,000 Redeemable
Common Stock Purchase Warrants (Redeemable Warrants). The initial public
offering prices of the Common Stock and the Redeemable Warrants was $5.00
and $0.50, respectively. Additionally, the Company sold 600,000 Redeemable
Warrants on the same terms and conditions as set forth above solely to cover
overallotments.
The Company has also agreed to sell to the underwriter, for nominal
consideration, warrants to purchase 90,000 shares of Common Stock and
400,000 Redeemable Warrants. The Underwriter's Warrants are initially
exercisable at a price of $6.00 per share of Common Stock and $0.60 per
Redeemable Warrant for a period of four years commencing one year from the
date of this Prospectus. The Redeemable Warrants underlying the
Underwriter's Warrants are exercisable at a price of $7.50 per share of
Common Stock.
Page 8 of 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales. Gross sales increased from $79,429 in the first three months of
1996 to $101,551 for the same period in 1997. This revenue increase reflected an
increase in sales volume from 497 barrels in the first three months of 1996 to
742 barrels for the same period in 1997. In addition, this increase reflected an
expansion of the Company's third party wholesale distribution network from 13
distributors at March 31, 1996 to 17 distributors at March 31, 1997.
Excise taxes. Excise taxes increased from $4,085 in the first three
months of 1996 to $7,297 for the same period in 1997, reflecting the increased
level of sales volume on which federal and certain local excise taxes are paid.
Excise taxes as a percentage of sales increased from approximately 5% in the
first three months of 1996 to approximately 7% for the same period in 1997. The
Company pays federal and certain local excise taxes on sales volume. However, in
certain jurisdictions local excise taxes are paid by the third party distributor
rather than the brewer. The increase in excise taxes as a percentage of sales is
primarily due to increased sales to such jurisdictions in the first three months
of 1996 as compared to the same period in 1997.
Cost of goods sold. Cost of goods sold increased from $208,592 in the
first three months in 1996 to $259,896 in the same period in 1997. Cost of goods
sold as a percentage of sales declined from approximately 263% in the first
three months of 1996 to 256% for the same period in 1997, primarily due to
increased sales which reduced per barrel fixed and semi-variable costs
associated with operating the brewery. This increase in cost of goods sold was
due primarily to increases in repairs and maintenance, depreciation, and
production salaries. The Company incurred increased maintenance costs in the
first quarter of 1997 associated with an increase production improvements. The
Company installed its new bottling line in the first quarter of 1997. The
Company experienced increased depreciation cost in connection with this new
bottling equipment. In addition, the increase in production salaries reflects an
increase in experience brewery personnel in the first three months of 1997.
Advertising, promotional and selling expenses. Advertising, promotional
and selling expenses increased from $12,825 in the first three months of 1996 to
$42,296 for the same period in 1997. Advertising, promotional and selling
expenses as a percentage of sales increased from approximately 16% for the first
three months of 1996 to approximately 42% for the same period in 1997. This was
primarily due to a significant increase in advertising costs for publications,
merchandising, and direct mail campaigns which accompanied the Company's
increased production.
General and administrative expenses. General and administrative
expenses increased from $65,099 in the first three months of 1996 to $237,441
for the same period in 1997. General and administrative expenses as a percentage
of sales increased from approximately 82% in the first three months of 1996 to
approximately 234% for the same period in 1997. The increases were primarily due
to increased amortization and salary costs. Amortization increased as a result
of a direct write-off of $60,000 of finance fees. In addition, the Company
incurred increased salary expenses in connection with the addition of a Chief
Operating Officer and additional management personnel.
Interest expense. Interest expense increased from $16,139 for the first
three months of 1996 to $2,957,814 for the same period in 1997. Interest expense
as a percentage of sales increased from approximately 20% in the first three of
1997 to 2,913% for the same period in 1997. This increase was due substantially
to the one-time write-off of unamortized original issue discount and
financing costs aggregating approximately $2,916,256 (or $1.06 per share) in
connection with the repayment of the Company's debentures and series B preferred
stock from the net proceeds of the Company's initial public offering in the
first quarter of 1997. The interest incurred in both periods is also associated
with the Company's promissory note in favor of CoreStates Bank, N.A. in
connection with a Small Business Administration loan (the "SBA Loan") and
Philadelphia Industrial Development Corporation notes ("PIDC Notes") .
Page 9 of 12
<PAGE>
Other Income, net. Other income, net declined slightly from $13,973 in
the first three months of 1996 to $13,397 for the same period in 1997. Other
income, net as a percentage of sales decreased from approximately 18% in the
first three months of 1997 to approximately 13% for the same period in 1997.
Liquidity and Capital Resources
To date, the Company has funded its operations and capital requirements
through the issuance of Common Stock, the SBA Loan, the PIDC Notes, the issuance
of certain subordinated convertible notes in 1995 and during 1996. In February
1997, the Company completed its initial public offering. The Company received
approximately $5,289,000 of proceeds, net of underwriting discounts and
underwriting expenses (including the purchase of 600,000 redeemable warrants
upon partial exercise of the Underwriter's overallotment option and after
deducting the Underwriter's discount and offering expenses) from the initial
public offering. Net cash used in operating activities in 1996 and 1997 during
the three months ended March 31 was $121,080 and $411,483 respectively. The
increase was primarily due to a significant increase of net operating loss and
decline in accounts payable which was only partially offset by the write-off of
the original issue discount discussed above.
Net cash used in investing activities in 1996 and 1997 during the three
months ended March 31 was $43,101 and $445,826 respectively. The increase was
due to the purchase of bottling equipment and trademark costs.
Net cash provided by financing activities in 1996 and 1997 for the
three months ended March 31 were $176,415 and $3,778,605, respectively. The
increase reflects the receipt of the net proceeds from the initial public
offering.
The Company had cash and cash equivalents at March 31, 1996 and March
31, 1997 of $363,484 and $3,284,780, respectively. The Company believes
that the net proceeds of the initial public offering will be sufficient to meet
short-term liquidity needs. The Company may also seek other long term financing.
No assurance can be given that such long term financing will be obtained on
commercially reasonable terms or at all.
Forward Looking Statements
The matters discussed in this Form 10-QSB that are forward looking
statements, relate to future events or the future financial performance of the
Company are based on current management expectations that involve risks and
uncertainties. Such statements are only predictions and actual events or
performance may differ materially from the events or performance expressed in
any such forward looking statements. Potential risks and uncertainties include,
without limitation: the impact of economic conditions generally and in the
industry for microbreweries; the potential decline in the level of demand for
the Company's products; the commencement of brewpub operations by the Company
and the inherent risks associated therewith; risk of third party claims
concerning the Company's intellectual property; loss of key personnel,
distributors or suppliers; limited product line; sales fluctuations due to
seasonality; continued competitive and pricing pressures in the industry;
product supply shortages; legal proceedings; and capital and financing
availability.
Inflation and Seasonality
Although the Company has not attempted to calculate the effect of
inflation, management does not believe inflation has had a material effect to
date on its results of operations. However, production and raw material costs
are expected to increase over time as a result of general economic inflation,
and there can be no assurance that the Company will be able to offset the
resulting negative effects on its business through increasing the sale prices of
its product.
Page 10 of 12
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security-Holders.
By written consent of the Company's shareholders effective February 7,
1997, the Company's shareholders resolved:
1. To amend the Corporation's Omnibus Stock Plan to increase the number
of options available thereunder to 300,000 shares and to amend the definition of
"Non-employee directors" to conform with the Securities Exchange Act of 1934, as
amended; and
2. To amend the Company's Amended and Restated Articles of
Incorporation to provide that 5,000,000 shares of preferred stock, the rights,
preferences and designations that may be determined by the board, shall be the
only preferred stock authorized upon the closing of the Company's initial public
offering and to authorize 24,000,000 shares of common stock, no par value.
By written consent of the Company's shareholders effective February 11,
1997, the Company's shareholders resolved:
1. To reconfirm the amendment of the Company's Amended and
Restated Articles of Incorporation as of the closing of the Company's initial
public offering as set forth above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports filed on Form 8-K.
None
Page 11 of 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Independence Brewing Company
By: /s/ Robert W. Connor, Jr.
------------------------------------
Robert W. Connor, Jr.
President, Chief Executive Officer
and principal accounting officer)
Date: May 15, 1997
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 3,284,780
<SECURITIES> 0
<RECEIVABLES> 19,193
<ALLOWANCES> 0
<INVENTORY> 128,253
<CURRENT-ASSETS> 3,432,226
<PP&E> 1,900,855
<DEPRECIATION> 175,344
<TOTAL-ASSETS> 5,269,049
<CURRENT-LIABILITIES> 452,694
<BONDS> 522,632
0
0
<COMMON> 8,980,413
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,269,049
<SALES> 101,551
<TOTAL-REVENUES> 94,254
<CGS> 259,896
<TOTAL-COSTS> 279,737
<OTHER-EXPENSES> (13,397)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,957,814
<INCOME-PRETAX> (3,389,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,389,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,389,796)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> 0
</TABLE>
